For companies just starting out or at Seed stage, insurance is usually something that is not thought about until someone you are doing business with asks for evidence of your insurance program. At that point it means the insurance was usually already required as part of a lease, a contract, a statutory requirement or a board member if you are at the stage where you have a board of directors. There are a lot of reasons why this is not the optimum time to be making a decision that could have a catastrophic impact on your company if not properly structured. In this post I will go into some of the impacts on why having discussions with your insurance broker should happen early on in a company’s lifecycle.
The first thing I want to clarify is that having discussions on insurance is not the same as putting an insurance program into place. With my clients I serve in a consultative role, I want to help them put into place what is appropriate, not what is dictated to them. What are my client’s risks? What are their plans over the next 12-18 months, best case and worst case? What are third parties requiring of your company? Are the third parties open to discussing what insurance is appropriate for a company with your risk profile? Do you and your counterparties understand why certain coverages might not be reasonable?
Many times I have seen clients enter into contracts with insurance requirements that are designed for Fortune 1,000 companies, not R&D organizations, which could have been negotiated to something more appropriate and economical had they engaged me earlier. A few examples:
- A biotech startup that has not yet started clinical trials and that outsources all their research who enters into an office lease for 1,500 square feet of space. The landlord requires $10,000,000 of Liability insurance despite the fact there are only a few employees and no third parties coming on site.
- A CRO requires a company conducting a small Phase I Oncology trial to carry $10,000,000 of Products Liability.
- An investigator requires a biotech to carry Errors & Omissions insurance despite the fact that there is no exposure.
These examples can be costly, but often times the counterparty is willing to negotiate or at least listen to why those limits do not make sense for a particular company. These are the discussions that need to be had before a contract is entered into but sadly they are often not and too much money is spent on something that is not needed. Yes, an attorney often reviews the contract but they are not experienced at knowing what the appropriate insurance limits should be.
Just as importantly, coverages that could cripple a company are often not addressed in these early stages. Unbelievably, all too often I come across companies at later stages and even with an FDA approved product on the market where these same issues are not addressed. All too often a program is simply renewed or placed with what coverage is appropriate when the program is put into place, not eight months from now. A couple of examples are not having adequate Dependent Business Income, Condemnation of Undamaged Stock, and Spoilage amongst many others. I hear the same thing over and over again, the client will give an update when things change but that does not happen and the broker often does not follow-up leaving the client exposed.
In the early stages of a company there is a need for speed but it is a time when the balance sheet is at its most fragile. It is so important to make sure that the most appropriate and economical insurance program is put into place. When a program is put into place on a reactionary basis versus a proactive basis things are missed and the long term costs often end up being higher.
If you are not having these conversations with your insurance broker early the repercussions could be huge. Your insurance broker should know your industry and what the risks are. Each industry has its own nuances when it comes to insurance protection, an insurance policy is a contract and not something to be taken lightly. There are insurance products for almost any risk today, but no one is going to put them all into place at the beginning, the important thing is that your broker helps you identify what the risks are and whether it can be insured and at what price. This allows you to make an informed decision on how to best deploy capital to the risks that are most important.